POLSTR Replacing WIBOR: What Does the Transition Mean for Corporate Loans and Financial Covenants?
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A large green cube featuring a percentage symbol, surrounded by smaller gold and brown cubes, symbolising interest rates and reference benchmarks such as WIBOR and POLSTR.
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POLSTR Replacing WIBOR: What Does the Transition Mean for Corporate Loans and Financial Covenants?

A large green cube featuring a percentage symbol, surrounded by smaller gold and brown cubes, symbolising interest rates and reference benchmarks such as WIBOR and POLSTR.

The reform of reference rates is not merely a technical exercise involving the replacement of one benchmark name with another. For businesses, it entails a range of substantive changes. A new methodology for calculating interest, revised requirements for liquidity models, and the need to reassess financial covenants and interest-rate hedging arrangements are only some of the implications. The transition should therefore be viewed as part of a company’s broader financial strategy.

Nie oznacza to jednak automatycznego aneksowania wszystkich umów. Zgodnie z aktualną mapą drogową WIBOR 1M, 3M i 6M będzie publikowany do 31 grudnia 2036 roku. Ma to umożliwić naturalne wygasanie portfela historycznego. Od początku 2027 roku WIBOR nie powinien być stosowany w nowych umowach i instrumentach. Zalecenie to będzie działało z ograniczonym wyjątkiem transakcji pochodnych służących zarządzaniu ryzykiem portfela legacy. (1)

POLSTR and WIBOR: An Economic Difference, Not Merely a Formal One

WIBOR is a forward-looking term benchmark calculated for specified tenors, such as one, three or six months. POLSTR, by contrast, is an overnight risk-free rate based on actual unsecured Polish-zloty deposit transactions conducted in the wholesale money market.

GPW Benchmark calculates POLSTR as a volume-weighted average rate following the application of defined data-quality filters. For longer interest periods, compounded POLSTR rates are available for one-, three- and six-month tenors, together with a single-base index. Compounded rates are calculated by compounding consecutive daily POLSTR observations over the relevant reference period. (2)

This distinction affects the point at which the final cost of financing becomes known. Where a compounded rate is calculated over a period that is still in progress, the final interest rate is derived from daily observations. A lookback mechanism may shift the observation period by several business days so that the amount of interest payable is known before the payment date.

How Will the Cost of Corporate Borrowing Change?

There is no basis for assuming that POLSTR will inherently be either lower or higher than WIBOR. The cost of debt will depend on the overall structure of the financing product. The most important components include the benchmark rate, the margin, any adjustment spread, the reset frequency, the interest period and the method used to compound daily rates.

In its recommendations for legacy corporate loans, the National Working Group identifies, among other options, a methodology based on compounded POLSTR with a five-business-day observation shift and an adjustment spread corresponding to the relevant WIBOR tenor. An alternative solution involves the POLSTR 1M Compounded Rate plus an appropriate adjustment spread.

The final approach will nevertheless depend on the type of financing, the contractual documentation and the arrangements agreed with the bank. The benchmark transition should therefore be considered in the broader context of the company’s debt and hybrid financing structure, including refinancing, investment financing and the availability of suitable hedging instruments.

For CFOs, this means moving away from the simple assumption of “WIBOR 3M plus margin” and towards a fully specified interest-calculation algorithm. The financial model should incorporate the business-day calendar, the applicable day-count convention, the lookback period, rounding rules, the adjustment spread, the payment date and any minimum benchmark-rate threshold, commonly referred to as a floor.

POLSTR and Financial Covenants

A change in the reference rate should not, in itself, result in a covenant breach. It may, however, alter the timing and distribution of interest expense and cash flows, thereby affecting the outcome of financial covenant tests.

The impact on Net Debt/EBITDA is likely to be the least direct, since EBITDA excludes interest expense. An indirect effect may nevertheless arise: higher interest payments may reduce cash balances, increase net debt or require the company to draw down additional financing facilities. For this reason, the reform should also be reflected in the company’s liquidity-management framework.

The following metrics and contractual provisions are likely to be more sensitive:

  • Interest Cover Ratio i EBITDA/Cash Interest;
  • Debt Service Coverage Ratio;
  • minimum cash or available-liquidity requirements;
  • cash-sweep mechanisms and restrictions on distributions to shareholders;
  • tests governing the incurrence of additional debt, capital expenditure and acquisitions.

In practice, the risk may arise not only from the level of the reference rate, but also from the date on which it is determined and the timing of interest payments. A company operating close to a covenant threshold may produce a different test result depending on how Cash Interest, accrued interest, net debt and hedging instruments are defined.

The Loan and the Hedge Must Remain Aligned

Any change to the underlying reference rate should be accompanied by a parallel review of the related swap, cap or collar. If the loan and the hedging instrument transition to POLSTR under different conventions, basis risk may arise, meaning that the economic hedge no longer matches the actual interest-payment profile.

The National Working Group indicates that the choice of conversion methodology should take into account the ability to manage risk effectively and to continue applying hedge accounting. The IFRS requirements relating to IBOR reform provide certain reliefs for changes arising directly from the reform, but they do not remove the need to document the modifications and reassess the hedging relationship. (3)

What Should Management Do Now?

The starting point should be a comprehensive inventory of all exposures linked to WIBOR and WIBID. This review should cover loans, leases, factoring arrangements, bonds, cash-pooling structures, intragroup loans and derivatives.

The company should then review maturity dates, fallback provisions, covenant definitions and the alignment between the underlying financing and its hedging arrangements. The financial model should include at least three interest-rate scenarios. Interest payments, covenant headroom and cash requirements should then be calculated separately under each scenario.

The POLSTR transition is a financial and contractual project, not merely an administrative amendment to existing documentation. A company that begins its analysis only when refinancing becomes necessary or a covenant breach is imminent may find itself in a materially weaker negotiating position vis-à-vis banks and other financing institutions.

Sources:

  1. https://www.knf.gov.pl/dla_rynku/Wskazniki_referencyjne/aktualnosci?articleId=98941&p_id=18
  2. GPW Benchmark, “Rules of the POLSTR Interest Rate Index” and “Rules of the POLSTR Compounded Indices Family”.
  3. National Working Group / Polish Financial Supervision Authority, “Recommendation on the Principles and Methods for Replacing the WIBOR/WIBID Reference Rates in the Legacy Corporate Client Portfolio”.